Assuming you are a man with average SES, average earnings, and education, at 70 there is a 50% chance you would live 13 years in the pre covid era. This Stange virus is still increasing mortality and morbidity with each infection. A male has a 32% chance of death by Age 70 in 2020, at the beginning of Covid-19 in the USA.
The average income replacement rate is currently about 38% for people who earned the median wage for 35 or more years. assuming you retire at the current full retirement age (FRA). The default plan is to trim about 23% of that 32% pension in less than a decade, while raising Medicare premiums and annual deductible. Haley proposes making that cut slightly less severe by raising the FRA to 70 as her (neoliberal) response to the changes we may want to make.
We may also want to raise the taxes on earnings to augment the Trust Fund, and or have a special Capital Gains Trust dedicated tax. One reason why the Trust Fund is running short is because the return to labor, as a percent of national personal income has been falling since 1975, The delta is over 50 trillion of non-inflation adjusted dollars. Another is, as the labor portion of the pie had been dwindling, the inequality of wages has been rising, thus allowing more workers to reach the annual maximum tax prior to the end of the year, thus depriving the Social Security Trust fund.
Another problem with the SS Trust fund is that there is an increasing inequality of years of life post-retirement depending on income, SES, and education. Also there is a great chance of those with higher incomes and savings to delay retirement, which yields a larger public pension (to people who live longer than average).
Another factor is that Congress has not adjusted the “deductible” for Social Security income since over 25 years ago. Thus the Trust fund has increased its life at the considerable tax expense of retired people. Since SS payout is progressive, the more you averaged in lifetime income prior to 70 the lower the payout rate is, dropping it much below 38% or so. The “deductible” has witnessed over 90% deflation since then, thus, in effect making the SS pension system considerably more progressive. People with higher than average paying jobs might not mind some progressivity, but certainly some would not prefer this generation increase in the greater equality of outcome.
Another attribute of the last half century is that some workers had no or low income after reaching adulthood due to more years being spent for education. Also, the net income to post 12th grade education attainment has changed as Parent Plus and Student Loans have been growing at faster than inflation, regardless of getting a degree or leaving/flunking out.
Another ding against labor is that fact that minimum wage peaked 1-1968 and median real (inflation adjusted) wage peaked 11-1972 (even though economy wide economic productivity continues to rise) Some people claim, in my view with low to no merit, that unions decrease labor productivity, Union member percentage of the labor force peaked before the mid 1950s. This to me shows low probability of the Union assertion being factual. Falling real income caused some household to send another worker into the market. The net result of that income gain has to be weighed against childcare costs, extra clothes and transportation costs and extra food costs due to less kitchen time being available per day. Perhaps even greater household stress, which trims telomere length (the ends of Chromosomes) It is partially mediated by the stress hormone cortisol and increases the natural rate of aging. This additional income was also trimmed due to getting into another tax bracket from the increased marginal income. Greater hours of labor per year per household eventually for some yielded less than zero utility.
Some people do not know that our low-income replacement rates are very unusual in the OECD (most of the world’s developed nations). I for one wish I was told that in HS Civics class in 1971. It would have been a useful piece of trivia with long term consequences. If you happen to find that out and you are a decade or less from FRA, your options are not as robust in my view. With the slated cut in benefits, we will be a true outlier like a Mexico or Chile. Last I knew Chile gave extra to the very low income retired. LS
Medical costs are generally higher in retirement, it can use up a significant portion of retirement income in the USA. To be fair, average cost is higher than median (50th percentile) but still my point is valid, I think. The Fidelity article does not include long term home care costs or other extended costs such as a nursing home. There has been 3 years of unusually high inflation since the $315,000 figure was released. I see one saving grace, now that we are in the Covid-19 era, there is a greater chance that you will not live as long, so medical expenses may be lower, ceteris paribus. With a possible increased retirement age, you could have more years to save for say a 15% smaller nest egg in the rainy-day fund. Everyone reminds me to look on the bright side, so… I listen.
To offset lower SS payouts, a $100,000 investment in an annuity (pension) will give you about $330 a month at age 65, less if you take it joint with a spouse. Unlike SS payments it loses to inflation. In 18 years at 4% inflation, it would be $165 a month, if the insurance company did not fail. Social Security is a free and valuable hedge against the risk of a long life. Also if you invested in markets, they could be down when you need to retire, your sequence of return (SOR) risk imply that you would have to under consume in your working years and use those marginal savings to hedge that risk. A century ago, the SOR of retiring in say 1926 would not have been foreseen, later the stock market declined and did not return to where it was until 25 years later not counting inflation. Perhaps your physical condition luckily happened to be ok, but your idea that effects of a SOR could be removed, or lessened by going back to work was shattered by the bleak employment picture and long breadlines of the Great Depression. My Pennsylvania Dutch relatives (Hausknecht) lost their home, land, and large barn, not because they stopped producing milk and other products, not because of an oversaturation in the US food supply, but there was next to no economic demand for food. Not all Recessions are as severe as the Great Depression, but, to be fair, “Back Swan” (tail risk) is much higher over the next 25 years than what many people believe. We had a major downturn (2006/7 “Great Recession” Market Panic not all that long ago. Newly retired people, or those forced into retirement by unemployment or heath, has severe actual SOR cost than will lower their consumption of goods and services till death. Or conversely, lower their children’s potential consumption due to a market atrophied estate.